Melwood Const. Corp. v. State

• Court: New York Court of Claims
• Writing for the Court: GERARD M. WEISBERG
• Citation: Melwood Const. Corp. v. State, 481 N.Y.S.2d 289, 126 Misc.2d 156 (N.Y. Ct. Cl. 1984)
• Decision Date: 26 October 1984
• Docket Number: No. 63926,63926
• Parties: MELWOOD CONSTRUCTION CORP., Claimant, v. STATE, Defendant (Claim)

Page 289

481 N.Y.S.2d 289

126 Misc.2d 156

MELWOOD CONSTRUCTION CORP., Claimant, v. STATE, Defendant

(Claim No. 63926.)

Court of Claims.

Oct. 26, 1984.

Goetz & Fitzpatrick, P.C. by William B. Flynn, New York City, for claimant.

Robert Abrams, Atty. Gen. by Michael W. Friedman, Asst. Atty. Gen., for defendant.

GERARD M. WEISBERG, Judge.

For more than a decade, the New York State Department of Transportation Standard Specifications (Standard Specifications), incorporated into highway construction, design, improvement and reconstruction contracts, has provided a schedule of damages for the failure of a contractor to complete work on time. The amount per calendar day is dependent on the original contract amount. ¹

The issue for determination is whether, in a government contract, this constitutes a provision for enforceable liquidated damages or an unenforceable penalty.

Claimant, Melwood Construction Corporation, contracted with the defendant, State of New York, on May 10, 1977, for the rehabilitation of four bridge structures. The original completion date was April 1, 1978. However, Melwood did not fully finish the work until December 20, 1978. Therefore, the State withheld $500 per day for a total of $55,500 as liquidated damages, ² which sum is a subject of this action.

The purpose of a liquidated damages clause is to settle in advance any claims that may result in the event of a breach of the contract. Such amounts are recoverable when the extent of actual damages that would result from a breach are difficult or impossible to ascertain. (Mosler Safe Co. v. Maiden Lane Safe Deposit Co., 199 N.Y. 479, 93 N.E. 81.) However, the damages must be intended as compensation to the injured party. Therefore, the stipulated amount must have a reasonable relation to the actual damages likely to have resulted from a default. (Truck Rent-A-Center v. Puritan Farms 2nd, 41 N.Y.2d 420, 425, 393 N.Y.S.2d 365, 361 N.E.2d 1015; Seidlitz v. Auerbach, 230 N.Y. 167, 129 N.E. 167; Weinstein & Sons, Inc. v. City of New York, 264 App.Div. 398, 35 N.Y.2d 530, affd. 289 N.Y. 741, 46 N.E.2d 351.) On the other hand, a stipulated damages provision is deemed punitive and unenforceable when it goes beyond compensation and serves to secure a party's performance of the contract. (Truck Rent-A-Center v. Puritan Farms 2nd, supra; 36 N.Y.Jur.2d, Damages § 154.)

In the present case, the State has acknowledged that the assessment of liquidated damages for each day of delay was intended solely as compensation for the inconvenience incurred by the public, rather than for any economic loss suffered directly by the State itself. ³ In fact, the assessment of liquidated damages was in addition to the assessment of engineering ($27,968) and other charges, ⁴ which were to compensate the State for its own additional expenses brought about by the delay.

The question thus is whether the inconvenience and injury suffered by the public constitute actual damages to the State qua contractee for which recovery may be had. If they are not, then the assessment of the stipulated amount must be deemed a penalty and the provision would be unenforceable.

In contracts between commercial parties, provisions for the payment of a sum for delay are usually upheld. Loss of profits and general financial harm to the business may, under certain circumstances, be considered--in addition to added costs for completion of the work--in determining whether the amount specified is proportional to the probable damages and, hence, not punitive. (See Curtis v. Van Bergh, 161 N.Y. 47, 55 N.E. 398; Ryan, P.C. v. Orris, 95 A.D.2d 879, 463 N.Y.S.2d 879.) Such profit-oriented considerations usually are not possible in contracts entered into by governmental bodies. ⁵ Therefore, a delay in performance which does not result in increased costs can result in no other financial loss to the contracting governmental body.

Nevertheless, the general principles of contract law governing the enforceability of a liquidated damages clause have been held to apply to a contract between a governmental body and a private party. (City of Rye v. Public Serv. Mut. Ins. Co., 34 N.Y.2d 470, 472, 358 N.Y.S.2d 391, 315 N.E.2d 458.) However, it must still be determined whether the clause in question is enforceable. It is, therefore, appropriate to review the pertinent cases in the area.

Weinstein & Sons, Inc. v. City of New York, supra, is an example of this peculiar bind in which governmental bodies may find themselves. In that case, the City made a purchase order for dress woolens to be delivered to a sewing project to be made into skirts and distributed by the Department of Welfare. The City retained 20% of the contract price as liquidated damages for delay in delivery of the goods. However, the Court held that "the facts and surrounding circumstances herein indicate that the so-called liquidated damages bore no reasonable relation to any probable or actual loss and that the clause in question provided for a penalty and not liquidated damages. The proof establishes that no claims were made against defendant and that defendant suffered no financial damage whatsoever." (Weinstein & Sons, Inc. v. City of New York, 264 App.Div. 398, 400, 35 N.Y.S.2d 530, supra.)

Subsequently, in United States v. Walkof, 144 F.2d 75, the U.S. Court of Appeals for the Second Circuit in an opinion by Judge AUGUSTUS N. HAND held, to the contrary, that a government agency may recover liquidated damages without actually suffering financial loss. The issue was the validity of a clause, in a War Department contract, for liquidated damages in the event of delay in the delivery of working suits. Noting that the contract was part of the Government's war effort, Judge HAND distinguished Weinstein on the significance of the harm a breach could cause. He observed that in Weinstein the inconvenience to the City's welfare work by the delay in delivery of the woolens was so insignificant as to not warrant recovery. However, regarding the delay in Walkof, the Court stated that "in obtaining equipment might result in losses far greater than the difference between the cost of the articles contracted for and others that might be obtained within a reasonable time. Delay might disrupt preparations for war in all sorts of ways ... We cannot see that the New York courts have any different rule from that of the United States Courts in respect to the allowance of liquidated damages for delay (United States v. Walkof, supra, p. 77.)

While unobstructed highways are not as vital as are preparations for war, the State Legislature has considered the problem of traffic delays significant enough to allocate over $1,000,000,000 a year for highway construction and repair, according to the testimony of Jack Sternback, the Deputy Chief Engineer in Charge of Construction for the New York State Department of transportation. The factors used in the determination of liquidated damages in highway construction contracts were also described by Mr. Sternback. These particulars have a direct relationship to the actual damage that the traveling public experiences as a result of late completions. They include speed reduction through work zones, delays incurred when portions of a highway are closed and the increased expense of operating vehicles at such times. Traffic volume, potential for a higher rate of accidents resulting from prolonged construction, and the comfort and convenience of motorists affected by work-related impediments are also taken into account.

In light of these considerations, Judge HAND's distinction between Weinstein and Walkof on the question of whether a governmental body may recover liquidated damages for injuries of a non-direct financial nature, should extend to the present highway case.

Furthermore, in subdivision 11 of section 2556 of the Education Law, the Legislature has evinced an intent to allow governmental bodies to recover liquidated damages for delays in public improvement contracts without having to prove economic damages. That statute authorizes cities with populations of a million or more to provide for liquidated damages in contracts for construction, alteration and repair, entered into by their boards of education. (See Kelly v. Board of Educ. of City of N.Y., 8 Misc.2d 1007, 169 N.Y.S.2d 405, affd. 7 A.D.2d 856, 182 N.Y.S.2d 342, affd. 8 N.Y.2d 764, ...